Thursday, July 31, 2014

In this post we will look at the automated backtesting results for four variations of a 38 days-to-expiration (DTE) NDX "no touch" iron condor (IC). The backtests results for the NDX "no touch" ICs are worse than than those for the SPX and RUT "no touch" ICs, but I am posting these results for the sake of completeness. The prior NDX "no touch" IC backtest results posts can be found at:

As with the prior tests on the RUT and SPX, the NDX short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta. These backtests are "no touch" tests, meaning there are no adjustments during the trades. In addition, there is not any hedging to start the positions leaning one direction or another. Many of these settings are available in the backtester, but we will only look at this baseline IC cases initially. See my post Thoughts on Options Strategy Backtests for additional background on my testing approach. The setup details for this series of backtests are shown below:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 38 DTE, 36 DTE (e.g., TOS). The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) Nasdaq 100 Index options
(6) Four 38 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts). This number was 20 for the RUT, 25 for the SPX, and is 25 for the NDX due to options availability.

The equity curves for each of the four delta variations are shown in the graph below. In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV). Please note that the dates in the chart are expiration dates, not trade initiation or closing dates. For example, the trade corresponding to the 12/17/2011 expiration was initiated on 11/09/2011 and closed on 12/09/2011. In all of the charts below, I will show data for trades by their expiration date.

If I pick a random expiration date from the chart below, for example 12/17/2011, we can see that when the trade was initiated, the ATM IV was 30. When the trade was closed, the cumulative non-compounded profit had grown to between $13.4k and $32.5k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $19.1k and $23.3k assuming your brokerage only margins one side of your IC. If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers. The 8 delta trade had the highest margin requirement, while the 20 delta trade had the lowest margin requirement. The margin difference is related to the difference in the size of the credits received. Higher delta equals larger credit; lower delta equals smaller credit.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta).

As with prior tests, the number of winning trades increases as the size of the short deltas decreases...the further away from ATM, the higher the win rate. The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate. The 8 delta variation has the strongest summary statistics.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations. The 0% cells represent expiration months were no trade was initiated. Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing. You can see the win rate decreasing as the heat maps move from lower delta to higher delta short strikes...more red cells.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration date. This data is shown in the graphs below. These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line). Also, note that the data in these charts corresponds to expiration dates, but the horizontal axis is not displaying expiration dates in order to make the charts less cluttered with labels.

The top graph displays P&L range for the 8 delta variation of the 38 DTE "no touch" IC. Even with the short duration of these trades, you can see that when a trade closes profitably the range is mostly on the positive side of the graph. With losing trades being exactly the opposite.

The middle graph shows the range of the underlying, the NDX, in percent terms during the life of each trade. The bullish bias of the US markets is evident even in this short duration trade.

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade. IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line). There were several times where ATM IV finished higher, and green...usually when there were market drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 38 DTE "no touch" IC strategy. You can see the increase in P&L volatility as the delta increase from 12 to 20.

In the next post we will review the 52 DTE "no touch" NDX IC. Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.

Also, if you don't want to miss new posts you can follow my blog either by email or RSS...both are free...and are available on the top of the right hand navigation column under the headings "Follow By Email" and "Subscribe To" respectively.

Tuesday, July 29, 2014

In this post we will look at the automated backtesting results for four variations of a 31 days-to-expiration (DTE) NDX "no touch" iron condor (IC). As I mentioned in my first NDX IC post, the backtests for the NDX "no touch" ICs are worse than either the SPX or RUT "no touch" ICs. I almost skipped posting the NDX "no touch" results because of this fact, but decided there was value in having a complete baseline comparison across the three indexes (RUT, SPX, NDX).

As with the prior tests on the RUT and SPX, the NDX short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta. See my post Thoughts on Options Strategy Backtests for some background on my testing approach. The prior NDX IC backtest results post can be found at:

These backtests are "no touch" tests, meaning there are no adjustments during the trades. In addition, there is not any hedging to start the positions leaning one direction or another. Many of these settings are available in the backtester, but we will only look at this baseline IC cases initially. Here are the setup details:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 31 DTE, 29 DTE (e.g., TOS). The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) Nasdaq 100 Index options
(6) Four 31 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts). This number was 20 for the RUT, 25 for the SPX, and is 25 for the NDX due to options availability.

The equity curves for each of the four delta variations are shown in the graph below. In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV). Please note that the dates in the chart are expiration dates, not trade initiation or closing dates. For example, the trade corresponding to the 04/16/2011 expiration was initiated on 03/16/2011 and closed on 04/08/2011. In all of the charts below, I will show data for trades by their expiration date.

If I pick a random expiration date from the chart below, for example 04/16/2011, we can see that when the trade was initiated, the ATM IV was 28. When the trade was closed, the cumulative non-compounded profit had grown to between $30.5k and $51.8k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $20.4k and $23.4k assuming your brokerage only margins one side of your IC. If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers. The 8 delta trade had the highest margin requirement, while the 20 delta trade had the lowest margin requirement. The margin difference is related to the difference in the size of the credits received. Higher delta equals larger credit; lower delta equals smaller credit.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta).

The NDX 31 DTE "no touch" IC variations have better summary statistics than the 24 DTE NDX variations. As with prior tests, the number of winning trades increases as the size of the short deltas decreases...the further away from ATM, the higher the win rate. The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate. The 8 delta and 12 delta variations have the strongest summary statistics.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations. The 0% cells represent expiration months were no trade was initiated. Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing. You can see the win rate decreasing as the heat maps move from lower delta to higher delta short strikes...more red cells.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration date. This data is shown in the graphs below. These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line). Also, note that the data in these charts corresponds to expiration dates, but the horizontal axis is not displaying expiration dates in order to make the charts less cluttered with labels.

The top graph displays P&L range for the 8 delta variation of the 31 DTE "no touch" IC. Even with the short duration of these trades, you can see that when a trade closes profitably the range is mostly on the positive side of the graph. With losing trades being exactly the opposite.

The middle graph shows the range of the underlying, the NDX, in percent terms during the life of each trade. The bullish bias of the US markets is evident even in this short duration trade.

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade. IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line). There were several times where ATM IV finished higher, and green...usually when there were market drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 31 DTE "no touch" IC strategy. You can see the increase in P&L volatility as the delta increase from 12 to 20.

It is worth reviewing the same P&L OHLC charts for the RUT and SPX 31 DTE "no touch" IC strategy variations. The RUT and SPX exhibit less P&L volatility with their strategy variations than the NDX.

In the next post we will review the 38 DTE "no touch" NDX IC. Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.

Also, if you don't want to miss new posts you can follow my blog either by email or RSS...both are free...and are available on the top of the right hand navigation column under the headings "Follow By Email" and "Subscribe To" respectively.

The ETFs, SPY, IWM, and QQQ have more volume than the RUT and NDX, but they are a fraction of the size of the indexes (SPY = aprox. 1/10 SPX, IWM = aprox. 1/10 RUT, QQQ = aprox. 1/40 NDX). This will result in more options contracts required for an ETF option position than for a similarly sized option position in the corresponding index. Another reason to stick with the indexes rather than ETFs is because of their tax treatment (1256 contract, form 6781).

In this post we will look at the automated backtesting results for four variations of a 24 days-to-expiration (DTE) NDX "no touch" IC. As with the prior tests on the RUT and SPX, the short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta. See my post Thoughts on Options Strategy Backtests for some background on my testing approach.

These backtests will be "no touch" tests; there will be no adjustments during the trades. In addition, there will be no hedging to start the positions leaning one direction or another. Many of these settings are available in the backtester, but we will only look at this baseline IC case initially. Here are the setup details:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 24 DTE, 22 DTE (e.g., TOS). The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) Nasdaq 100 Index options
(6) Four 24 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts). This number was 20 for the RUT, 25 for the SPX, and will be 25 for the NDX due to options availability.

In general, the backtests for the NDX "no touch" ICs are worse than either the SPX or RUT "no touch" ICs. I almost skipped posting the NDX "no touch" results because of this fact, but decided there was value in having a complete baseline comparison across the three indexes.

The equity curves for each of the four delta variations are shown in the graph below. In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV). Please note that the dates in the chart are expiration dates, not trade initiation or closing dates. For example, the trade corresponding to the 06/18/2011 expiration was initiated on 05/25/2011 and closed on 06/10/2011. In all of the charts below, I will show data for trades by their expiration date.

If I pick a random expiration date from the chart below, for example 06/18/2011, we can see that when the trade was initiated, the ATM IV was 16. When the trade was closed, the cumulative non-compounded profit had grown to between $5.5k and $20.8k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $20.0k and $23.6k assuming your brokerage only margins one side of your IC. If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers. The 8 delta trade had the highest margin requirement, while the 20 delta trade had the lowest margin requirement. The margin difference is related to the difference in the size of the credits received. Higher delta equals larger credit; lower delta equals smaller credit.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta).

The NDX 24 DTE "no touch" IC variations have some of the worst summary statistics of all of the IC strategies. As with prior tests, the number of winning trades increases as the size of the short deltas decreases...the further away from ATM, the higher the win rate. The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations. The 0% cells represent expiration months were no trade was initiated. Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing. You can see the win rate decreasing as the heat maps move from lower delta to higher delta short strikes...more red cells.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration date. This data is shown in the graphs below. These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line). Also, note that the data in these charts corresponds to expiration dates, but the horizontal axis is not displaying expiration dates in order to make the charts less cluttered with labels.

The top graph displays P&L range for the 8 delta variation of the 24 DTE "no touch" IC. Even with the short duration of these trades, you can see that when a trade closes profitably the range is mostly on the positive side of the graph. With losing trades being exactly the opposite.

The middle graph shows the range of the underlying, the NDX, in percent terms during the life of each trade. The bullish bias of the US markets is evident even in this short duration trade.

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade. IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line). There were several times where ATM IV finished higher, and green...usually when there were market drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 24 DTE "no touch" IC strategy. You can see the increase in P&L volatility as the delta increase from 12 to 20.

In the next post I will move on to the 31 DTE "no touch" NDX IC. Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.

Lastly, if you don't want to miss new posts you can follow my blog either by email or RSS...both are free...and are available on the top of the right hand navigation column under the headings "Follow By Email" and "Subscribe To" respectively.

In order to compare these trades, I've converted the non-compounded AGR dollar amounts to percentages. The denominator in these calculations for a strategy is the maximum margin for that strategy. The max margin numbers are included in the tables below. For example, in order to get the percentage returns for the SPX 80 days-to-expiration (DTE) 8 Delta strategy variation, the dollar return for each month was divided by $23,350.

The equity curves for the SPX and RUT strategy variations are grouped by DTE. Each chart below represents a given DTE, and shows the percentage returns for both the RUT and SPX delta variations for that given DTE. We will start with the 80 DTE strategy first, and the proceed through the DTEs in descending order.

Wednesday, July 16, 2014

In this blog post we will look at the automated backtesting results for four variations of a 80 days-to-expiration (DTE) SPX "no touch" Iron Condor (IC). As with the prior backtests, the short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta. See my post Thoughts on Options Strategy Backtests for some background on my testing approach. The prior SPX IC backtesting results posts can be found at:

These SPX backtests will be "no touch" tests; there will be no adjustments during the trades In addition, there will be no hedging to start the positions leaning one direction or another. Many of these settings are available in the backtester, but we will only look at this baseline IC case initially. The setup details are shown in the table below:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 80 DTE, 78 DTE (e.g., TOS). The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) S&P 500 Index options
(6) Four 80 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts). This number was 20 for the RUT, but had to be increased to 25 for the SPX due to options availability at longer DTE.

The equity curves for each of the four delta variations are shown in the graph below. In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV). Please note that the dates in the chart are expiration dates, not trade initiation or closing dates. For example, the trade corresponding to the 02/18/2012 expiration was initiated on 11/30/2011 and closed on 02/10/2012. In all of the charts below, I will show data for trades by their expiration date.

If I pick a random expiration date from the chart below, for example 02/18/2012, we can see that when the trade was initiated, the ATM IV was 26. When the trade was closed, the cumulative non-compounded profit had grown to between $39.8.8k and $76.8k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $20.1k and $23.3k assuming your brokerage only margins one side of your IC. If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers. The 8 delta trade had the highest margin requirement. The margin difference is related to the difference in the size of the credits received. Higher delta equals larger credit; lower delta equals smaller credit.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta). In the equity curve image above, the 8 and 12 delta variations appear to be the most "well behaved" and this is confirmed by the Sharpe and Sortino ratios below.

Similar to the other "no touch" trades tested, there are some big drawdowns in these trades because of the lack of adjustments and hedging. The number of winning trades increases as the size of the short deltas decreases...the further away from ATM, the higher the win rate. The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate. The non-compounded AGR increases with decreasing delta, which is the opposite of the pattern we have observed in many of the prior posts.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations. The 0% cells represent expiration months were no trade was initiated. Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing. Compared with other DTE SPX condors, there were more months where the backtester was not able to find suitable trades. You can see the win rate decreasing as the heat maps move from lower delta to higher delta short strikes...more red cells.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration date. This data is shown in the graphs below. These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line) . Also, note that the data in these charts corresponds to expiration dates, but the horizontal axis is not displaying expiration dates in order to make the charts less cluttered with labels.

The top graph displays P&L range for the 8 delta variation of the 80 DTE "no touch" IC. Even with the short duration of these trades, you can see that when a trade closes profitably the range is mostly on the positive side of the graph.

The middle graph shows the range of the underlying, the SPX, in percent terms during the life of each trade.

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade. IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line). There were several times where ATM IV finished higher, usually when there were market drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 80 DTE "no touch" IC strategy. You can see the increase in P&L volatility as the delta increase from 12 to 20.

Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.

Sunday, July 13, 2014

In this blog post we will look at the automated backtesting results for four variations of a 66 days-to-expiration (DTE) SPX "no touch" Iron Condor (IC). As with the prior backtests, the short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta. See my post Thoughts on Options Strategy Backtests for some background on my testing approach. The prior SPX IC backtesting results posts can be found at:

These SPX backtests will be "no touch" tests; there will be no adjustments during the trades In addition, there will be no hedging to start the positions leaning one direction or another. Many of these settings are available in the backtester, but we will only look at this baseline IC case initially. The setup details are shown in the table below:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 66 DTE, 64 DTE (e.g., TOS). The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) S&P 500 Index options
(6) Four 66 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts). This number was 20 for the RUT, but had to be increased to 25 for the SPX due to options availability at longer DTE.

The equity curves for each of the four delta variations are shown in the graph below. In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV). Please note that the dates in the chart are expiration dates, not trade initiation or closing dates. For example, the trade corresponding to the 11/19/2011 expiration was initiated on 09/14/2011 and closed on 11/11/2011. In all of the charts, I will show data for trades by their expiration date.

In the chart below, if we use the same expiration date of 11/19/2011, we can see that when the trade was initiated, the ATM IV was 30. When the trade was closed, the cumulative non-compounded profit had grown to between $21.7k and $50.1k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $20.4k and $23.9k assuming your brokerage only margins one side of your IC. If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers. The margin difference is related to the difference in the size of the credits received. Higher delta equals larger credit; lower delta equals smaller credit.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta). Starting in late 2009/early 2010, the 8 delta variation exhibited the smallest variability in returns.

Similar to the other "no touch" trades tested, there are some big drawdowns in these trades because of the lack of adjustments and hedging. The number of winning trades increases as the size of the short deltas decreases...the further away from ATM, the higher the win rate. The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate. The 12 and 16 delta variations have similar AGRs, and the 8 and 20 delta variations have similar AGRs.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations. The 0% cells represent expiration months were no trade was initiated. Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing. You can see the win rate decreasing as the heat maps move from lower delta to higher delta short strikes...more red cells.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration date. This data is shown in the graphs below. These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line) . Also, note that the data in these charts corresponds to expiration dates, but the horizontal axis is not displaying expiration dates in order to make the charts less cluttered with labels.

The top graph displays P&L range for the 8 delta variation of the 66 DTE "no touch" IC. Even with the short duration of these trades, you can see that when a trade closes profitably the range is mostly on the positive side of the graph.

The middle graph shows the range of the underlying, the SPX, in percent terms during the life of each trade.

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade. IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line). There were several times where ATM IV finished higher, usually when there were market drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 66 DTE "no touch" IC strategy. You can see the increase in P&L volatility as the delta increase from 12 to 20.

The next post will cover the 80 DTE "no touch" SPX IC. Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.

Wednesday, July 9, 2014

In this blog post we will look at the automated backtesting results for four variations of a 52 days-to-expiration (DTE) SPX "no touch" Iron Condor (IC). As with the prior backtests, the short strikes for both the call credit spreads and put credit spreads will be at approximately the same delta. See my post Thoughts on Options Strategy Backtests for some background on my testing approach. The prior SPX IC backtesting results posts can be found at:

These SPX backtests will be "no touch" tests; there will be no adjustments during the trades In addition, there will be no hedging to start the positions leaning one direction or another. Many of these settings are available in the backtester, but we will only look at this baseline IC case initially. The setup details are shown in the table below:

(1) The backtester will start looking for trades that meet the entry DTE requirement after this date
(2) The backtester will not take any trades that will have an exit DTE after this date
(3) Some trading platforms call 52 DTE, 50 DTE (e.g., TOS). The OSB uses a DTE based on the number of days to the expiration date in the option code/opra code, which is a Saturday for indexes
(4) Some trading platforms call 8 DTE, 6 DTE (e.g., TOS)
(5) S&P 500 Index options
(6) Four 52 DTE "no-touch" iron condors will be tested with their short strikes at varying deltas (8, 12, 16, and 20)
(7) The distance between the short call and long call (also, the distance between the short and long puts). This number was 20 for the RUT, but had to be increased to 25 for the SPX due to options availability at longer DTE.

The equity curves for each of the four delta variations are shown in the graph below. In addition to the equity curves, the ATM IV at trade initiation is also plotted (the average of the ATM call IV and ATM put IV). Please note that the dates in the chart are expiration dates, not trade initiation or closing dates. For example, the trade corresponding to the 10/18/2008 expiration was initiated on 08/27/2008 and closed on 10/10/2008. In all of the charts below, I will show data for trades by their expiration date.

If I pick a random expiration date from the chart below, for example 03/20/2010, we can see that when the trade was initiated, the ATM IV was 20. When the trade was closed, the cumulative non-compounded profit had grown to between $7.8k and $47.5k depending on the short delta of the variation of the strategy.

For these trades, the maximum reg-t margin requirement is between $22.3k and $27.5k assuming your brokerage only margins one side of your IC. If you have portfolio margin, your requirement is somewhere around one-quarter to one-half the reg-t margin numbers. The 8 delta trade would have had the highest margin requirement, except for the fact that the 20 delta variation had one bad trade entry which made its max margin $27.5k. Without this outlier the margin range would have been between $22.3k and $22.8k. The margin difference is related to the difference in the size of the credits received. Higher delta equals larger credit; lower delta equals smaller credit.

In the table below are the standard trade metrics for the four ICs with different short strikes (8 delta, 12 delta, 16 delta, and 20 delta). In the equity curve image above, the 8 and 12 delta variations appear to be the most "well behaved" and this is confirmed by the Sharpe and Sortino ratios below.

Similar to the other "no touch" trades tested, there are some big drawdowns in these trades because of the lack of adjustments and hedging. The number of winning trades increases as the size of the short deltas decreases...the further away from ATM, the higher the win rate. The combination of shorter DTE and closeness of the short strikes makes the higher delta condors have a lower win rate. The non-compounded AGR does not follow the familiar pattern of decreasing with short strike delta. The 12 delta has the best AGR, followed by the 8 delta, 16 delta, and the 20 delta.

In the heat maps, we can see the performance by expiration month of each of the individual trades of each of the four delta variations. The 0% cells represent expiration months were no trade was initiated. Some of these 0% cells are due to lack of data or bad prints on the trade entry day...leading the backtester to skip that month for testing. You can see the win rate decreasing as the heat maps move from lower delta to higher delta short strikes...more red cells.

We can also look at the 8 delta strategy in terms of the P&L range (in %), range of the underlying (in %), and IV range (in %), for each trade by expiration date. This data is shown in the graphs below. These graphs are showing the open, which is the 0% level, the high (green bar), the low (red bar), and the value at trade close (the blue line) . Also, note that the data in these charts corresponds to expiration dates, but the horizontal axis is not displaying expiration dates in order to make the charts less cluttered with labels.

The top graph displays P&L range for the 8 delta variation of the 52 DTE "no touch" IC. Even with the short duration of these trades, you can see that when a trade closes profitably the range is mostly on the positive side of the graph.

The middle graph shows the range of the underlying, the SPX, in percent terms during the life of each trade.

The bottom graph shows the ATM IV range and closing value in percent terms, during the life of each IC trade. IV decays to zero as we approach expiration, so you would expect these bars to be mostly red, with the closing value to be negative (the blue line). There were several times where ATM IV finished higher, usually when there were market drops.

The next three graphs show the P&L range for the 12 delta, 16 delta, and 20 delta variations of this 52 DTE "no touch" IC strategy. You can see the increase in P&L volatility as the delta increase from 12 to 20.

Next week I will post the results of the 66 and 80 DTE "no touch" SPX ICs. Drop me a note if you'd like to see different data presented, and I'll do my best to incorporate your suggestions in upcoming posts.

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